When your business engages contractors, it is important to create reasonable and fair obligations within the agreement. If there is a significant imbalance in negotiating power between you and your independent contractors, contractors can request a court to set aside or amend the contract. Notably, contractors have protection against unfair or harsh contracts by law under the Independent Contractors Act 2006. To avoid disputes with your contractor, this article explores how your business can comply with workplace obligations through fairly drafted service contracts.
Reasons to Set Aside a Contract
It is typical for businesses to have more negotiating power than contractors when engaging in business together. As such, you need to be careful that this power imbalance does not create unfair or unreasonable terms within the service agreement with your contractor. If it does, you risk a contractor going to court and arguing that the contract is unfair.
Under the Independent Contractors Act, a court can set aside a services contract if:
- it is unfair or unjust;
- it is harsh or unconscionable;
- the terms are against the public interest;
- it provides a lower rate of pay to an employee performing similar duties; or
- it avoid or is designed to avoid Australia’s workplace laws, including the Fair Work Act.
Business Considerations
When drafting and negotiating the services contract, consider the contractor’s commercial knowledge and bargaining power. The contract terms should not unnecessarily burden the contractor or unfairly favour your interests.
For instance, avoid including an indemnity clause that only protects your business but not the contractor.
You should also ensure that the contract negotiations are not heavily weighted in your favour. For example, failing to give the contractor enough time to review the contract and provide feedback may be considered unfair. In that case, you risk the contractor exercising their rights and asking the court to overturn the agreement.
Sham Contracting
Sham contracts (i.e. disguising an employment contract as a contractor arrangement) are also examples of unfair contracts. This is where you draft the contract in a way that labels the worker as a contractor to avoid paying obligations if they were an employee.
Sham contracting requires the business that is engaging the contractor to either:
- intentionally set up the relationship so as to avoid their obligations; or
- be reckless as not to check whether the worker was an employee.
Contractors Rights
The law allows an independent contractor to apply to the Federal Court of Australia or the Federal Circuit Court to review a services contract because it is harsh or unfair. After reviewing the contract’s terms and the background of the parties, a court may order you to either:
- amend the contract;
- remove certain clauses in the contract or make them ineffective; or
- set aside the contract.
Unlike other court proceedings, the court does not award costs to the successful party. The court will only award costs where the contractor commenced proceedings to annoy the company or if the case does not have reasonable prospects of success. If one party incurs costs because of an unreasonable act or omission by the other party, the court may order the responsible party to cover some or all of those costs.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
To avoid a matter escalating to court, you should implement a dispute resolution mechanism in your workplace. Notably, it is good practice to include this mechanism within a workplace policy, so that it is accessible to all employees. This policy should address how an independent contractor can report disputes to management and how their complaints will be heard.
Further, ensure an independent person is tasked with hearing complaints, such as a manager. Likewise, you should carefully document the discussions that arise at these meetings, as they are important for your case if the matter proceeds to court. Ultimately, you want to ensure you act reasonably and fairly and document the steps your business takes to resolve disputes.
Key Takeaways
Engaging a contractor involves entering into a service contract. This contract should fairly outline each party’s obligations and include dispute resolution methods. Importantly, be aware of a contractor’s right to apply to the Federal Court of Australia or the Federal Circuit Court if they feel the contract is unfair. If a court agrees that the contract is unfair, harsh, or against the public interest, they can:
a court may order you to either order you to:
- amend the contract;
- remove certain clauses in the contract or make them ineffective; or
- set aside the contract.
If you need assistance understanding your obligations towards your contractors, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Sham contracting refers to disguising an employment contract as a contractor arrangement, This is a type of unfair contract. Sham contracting requires the company to either intentionally set up the relationship so as to avoid their obligations or is reckless as not to check whether the worker was, in fact, an employee. There are large penalties for engaging in sham contracting, even when unintentional.
An independent contractor may apply to the Federal Court of Australia or the Federal Circuit Court to review a services contract because it is harsh or unfair. After reviewing the terms of the contract and the background of the parties, a court may order you to either amend the contract, remove certain clauses in the contract, make it ineffective, or set aside the contract.
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